What is deferred compensation?

Deferred compensation is a common way to save for retirement and other purposes. It's also used in executive compensation packages and by some workers who want to put away money for retirement while they're still working or paying down debt.

There are two types of deferred compensation: qualified and non-qualified.

Deferred Compensation Tax Benefits

One of the key benefits of deferred compensation is that it can provide tax advantages to both employees and employers.

For employees, deferred compensation can help reduce their taxable income in the year that the deferral is made, which can help lower their overall tax liability. In addition, many deferred compensation plans allow the funds to grow tax-free until they are withdrawn, which can help employees save more for retirement.
For employers, offering deferred compensation can be a way to attract and retain key employees, while also providing tax benefits. Contributions made to deferred compensation plans are tax-deductible for employers, which can help lower their overall tax liability. In addition, deferred compensation plans can help companies avoid certain taxes, such as Social Security and Medicare taxes, on the deferred compensation amounts.